Reserve Currency

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Reserve Currency


a currency accumulated by the central bank of a country for making international payments. Usually, a convertible currency is used as the reserve.

In the late 1960’s and early 1970’s the US dollar, the British pound sterling, and the West German mark were the most widely used reserve currencies, accounting for more than half the international payments turnover of the capitalist countries. The French franc, the Japanese yen, the Dutch guilder, and the Swiss franc are far less extensively used as reserve currencies.

The use of a currency as a reserve currency depends on the extent of a country’s participation in the international division of labor and on its role in international trade. As a rule, a reserve currency is either a “trade currency” that accounts for a significant volume of the turnover in international trade or a currency that is associated with a country characterized by high economic potential (that is, a country that supplies the world market with a broad range of high-quality goods). The position of a currency on the international loan capital market is very important. For example, although the Swiss franc is not a trade currency, it is used as a reserve currency because Swiss banks, which have a high international reputation, offer tremendous possibilities for quickly mobilizing considerable monetary assets. Moreover, deposits in Swiss banks are considered a reliable investment of capital.

The choice of a country’s currency as a reserve currency is also related to the technical feasibility of making international payments and, in particular, to the presence in the country of a well-developed network of banking institutions with an international reputation. Thus, despite the substantial decline of Great Britain’s role in the world market and despite the drop in the value of the pound sterling, British currency is still used as a reserve currency because Great Britain has a worldwide network of banks (seeFOREIGN-EXCHANGE RESERVES).


References in periodicals archive ?
In a world of uncertainty, the dollar has risen to the supreme currency of choice against other currencies in the IMF basket of reserve currencies.
Each of the current third-largest reserve currencies, the Japanese yen and the pound sterling, accounts for only 4 percent of global central bank reserve allocation.
Moreover, the eurozone, Japan, and the United States have large and rising public debt burdens, which rinses questions about their macroeconomic stability but has not (yet) affected their currencies' status as reserve currencies.
The governor pointed out that one alternative was to have a menu of reserve currencies.
After accounting for all of the traditional reserve currencies, however, the IMF lumped 7 percent of foreign-currency reserves in an "other currencies" category--an eye popping amount.
We achieve this by investing in a diversified portfolio of short-dated sovereign credit instruments, whose currencies are expected to strengthen against the US$ and other traditional reserve currencies ([pounds sterling], E, [yen]).
Indeed, they exclusively looked at the two currencies use as reserve currencies.
In a thinly veiled criticism of the United States, Hu urged countries that issue reserve currencies to adopt responsible policies and maintain relatively stable exchange rates.
It marked the first time the United Nations had intervened on the topic of reserve currencies.
According to the Saudi central bank governor, Special drawing rights (SDR) will not compete with key reserve currencies for the foreseeable future because they are not used to denominate widely traded assets.
Masafumi Yamamoto, head of foreign exchange strategy at the Royal Bank of Scotland, said talk about alternative foreign reserve currencies instead of the dollar has been used as a cue to sell the dollar.
It criticized the existing reserve currencies, including the dollar and pushed for the creation of supranational currency.

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